Retail earnings, consumer trends show 'these are definitely not good times': Strategist

Bernstein Senior Analyst Aneesha Sherman and Storch Advisors CEO Gerald Storch, who is also the former CEO of Toys "R" Us and Hudson's Bay, join Yahoo Finance Live to discuss the state of the consumer, the trade down trend, luxury retail, and inventory levels.

Video Transcript

SEANA SMITH: Retail has been a big story this week as investors have dug into earnings reports from Target, Walmart, Home Depot just to name a few. One of the big takeaways from this week, companies calling out the cautious consumer.

MICHAEL FIDDELKE: Consumer spending patterns continue to evolve, putting significant pressure on our discretionary categories.

DOUG MCMILLON: The stubborn inflation in dry grocery consumables is one of the key factors creating uncertainty for us in the back half of the year because of the cumulative impact on discretionary spending and other categories, specifically general merchandise.

MICHAEL HARTSHORN: The low-end customer continues to be pressured, whether it's the ongoing inflation, reduction in SNAP benefits, lower tax refunds.

TED DECKER: The newer dynamic now that we're really seeing again just this past quarter is a more cautious consumer given the broader macro concerns, including credit availability.

SEANA SMITH: Joining us now for more on this, we want to bring in Jerry Storch, Storch Advisors CEO, also former CEO of Toys R Us. We also have Aneesha Sherman, Bernstein senior analyst here to help us break down all of these reports. Jerry, first to you, just in terms of this cautious consumer message that we have gotten time and time again over the last five days, what does that signal just about some of the cracks that we're starting to see?

- Well, it's not new. This is very predictable. The consumer actually started to slow last summer and it's been pretty much a straight line since then. For the last eight months now in a row, retail sales have been negative when adjusting for inflation when you look at it on a year over year basis. And that's how retailers think about, that's how the reports come out.

What's your comp sales? How did this year do compared to last year? And the answer is for the economy as a whole, it's been negative and getting worse for eight straight months. The consumers are increasingly stretched. And they're running out of money and they're leveraging up their credit cards.

AKIKO FUJITA: And Aneesha, are we starting to see some of that bottom out or at least starting to see some of that improvement? And what do you make of the way that some of these retailers, especially the big box names that reported this week, have adjusted to that?

- I think what we're seeing differently this year-- I agree that overall the sector has been pressured. But what we're seeing differently this year is last year the mainstream and premium consumer was doing great. I mean, if you look at the numbers of some of the mainstream and premium brands in the sector, they were growing double digit in North America. And they are now comping off some really tough numbers from last year and their consumer is starting to pull back.

The low-income consumer has been under pressure for over a year now. And so I think what we're seeing differently than what we did a year ago is some trade down. So we've seen transactions at Walmart, at Target, at TJX, at Ross positive year over year, which suggests that there is some trade down coming into the value side of the equation as some of those mainstream consumers make different choices. And that's what some of the new data is showing that wasn't the case last year.

So for value retail, I think it's a positive. I mean, they continue to see their low-income consumer being pressured. That's not changed. What they're seeing differently is some people opting into value that used to be buying more expensive items six, eight, nine months ago.

SEANA SMITH: Jerry, that trade downtrend that Aneesha is talking about, is that trend here to stay? And aside from Walmart, who's best positioned for that?

GERALD STORCH: Well, it's here for a while. Since 1961, both Target and Walmart were founded. In tougher times, Walmart does better. And in worse times, Target does-- I mean, I'm sorry. In good times, Target does better.

These are definitely not good times. And you see that even though everyone talks about the consumer being pressured, Walmart's comp sales were 7.6% or something, very high comp sales. Target was flat. Walmart was way up on the internet. Target was negative on the internet.

So Target's really just not made, sort of, to function in this kind of environment. Whereas, Walmart with the heavy emphasis on food, consumables, and value really, really is. So I think Walmart is absolutely positioned to do well here. And so all the value retailers really are as you just heard. I think that's true.

I do think, though, there's a big gap between people like Target or Costco, you know who, on the one hand, Costco will do great in any environment, Target will not. Walmart and Ross, even though they're all value stores, you see Walmart with the food being able to do well. Consumable purchases like apparel are not going to do as well.

So there's companies like Five Below that I think will look very strong throughout, value player, kind of, NeeDoh type of merchandise. So there'll be winners and losers. Not all boats rise. And just because you have value attached to your name doesn't mean you'll win either.

AKIKO FUJITA: Yeah. Aneesha, an interesting comment here from Jerry because he talks about the gap that we're seeing within the value names. But we've really seen a huge gap between value everyday purchases and then the luxury consumer, which has been largely resilient.

We were talking about luxury watches yesterday still doing really well. How sustainable is that? And are we starting to see any cracks on that end?

ANEESHA SHERMAN: For high luxury, no. That consumer is not subject to some of these pressures that we're talking about. Inflation, fuel costs, it's really not impacting a consumer that is buying high luxury.

Now, in the mainstream side, which you're talking about slightly above mainstream premium, absolutely. They are the ones who are trading down. And even last quarter, we saw Macy's, Nordstrom, Kohl's, all the department stores, many of the mainline brands talking about losing traffic. Because those consumers are the ones who are pulling back and they are now opting into value retail.

So putting food aside, I mean, obviously, food spend is different and it's more inelastic. Discretionary spend, yes, the mainstream consumer is pulling back and making different choices than they were making a year ago. And that is benefiting some of the lower-end retailers, but it's not the high luxury consumer. That is still going strong and is unimpacted by some of these macro headwinds.

SEANA SMITH: Aneesha, what about inventory levels? There has been such a focus on that leading up to this quarter. We saw some improvement from Target.

Home Depot was flat. Walmart's also declined. Have retailers fix this problem? And how big of a boost do you potentially see that to margins?

ANEESHA SHERMAN: We are way past the peak. Retailers have made a lot of progress. And we heard it even from them in Q4. We've heard it in our channel checks. They've offloaded a lot of inventory.

Now where has it gone? It's gone to liquidators, jobbers. A lot of it was sold into off price where they're holding it and pack away to sell through to the consumer later. So it's not out of the system yet, but many of them, the leading brands and retailers, have cleared it off their balance sheets.

We're past the peak, they're still clearing. But we're past the peak of it and they're ordering much lower. So the net effect is going to be declining over the course of this year.

That said, it's still in the system. So it's not coming out of the system, I think, at least until another three or four quarters depending on how strong demand is. Because that's the other side of it, they can't sell it through if there isn't demand. So if demand continues at the trend it's at, now I think Q1 '24 is the first we'll see where the system is clean. If demand continues to decelerate, it could even be further along.

AKIKO FUJITA: Jerry, when you put together economic data that we've gotten so far on the consumer, you mesh that with what we heard from executives on these earnings calls this week. Who do you think is best positioned right now? Who's operating from a place of strength when you look at the retail landscape?

GERALD STORCH: Well, I think we've been through it. There's not much doubt that Walmart is in a very strong place. And keep in mind, it's not just that they know how to operate in these times, it's that they really are heavily focused on food and consumables. And that people have to buy and do and they trade into Walmart in tough times.

And Walmart is the nation's largest grocer and they're gaining share. And so they are exceptionally well positioned. I think Amazon is another company that it's very complex to analyze because of the cloud business, and the retail business, and all the pieces that are flying around there. But you notice the internet is back growing again faster than bricks and mortar. And Amazon, in many ways, still is the internet.

We saw a great performance in the internet by Walmart, a very poor performance by Target. And so meanwhile, you know, I'm not embarrassed to admit I order something from Amazon almost every day of the week. And I think most of us do really look at it. So I think they're in a very strong place as well. And so many of the trends that we saw pre-pandemic are reasserting themselves with a heavy value focus at this time.

AKIKO FUJITA: You are certainly not alone in your Amazon orders there, Jerry. Jerry Storch and Aneesha Sherman, good to talk to both of you today. Have a good weekend.